Advice and Resources for Getting Started with ESG/SRI Investing

But first, some acronyms

When talking about impact investing, two acronyms often come up: SRI and ESG.

Socially responsible investing (SRI) focuses on deploying investment dollars away from certain areas a fund manager may deem undesirable, such as companies that produce weapons, tobacco products or oil. One way to think about it is like this: whereas impact investing channels funds into doing good, SRI uses screens and filters to steer money away from doing harm. Again, just like with any investment, strong financial performance and risk management are prioritized.

That’s also the case with environmental, social and governance (ESG) investing. Like SRI, ESG investing generally serves as a screen to identify and weed out companies with unacceptable environmental, social, and governance practices while prioritizing financial returns.

ESG screening typically happens while conducting due diligence on a potential investment, and it’s most commonly used in the context of public market investing, where an entity is evaluated on whether or not it’s taking sufficient steps to meet or exceed specific areas of corporate responsibility. Because of ESG investing’s ability to identify things like unethical supply chains and harmfully sourced materials, research suggests that ESG-focused investments can lower the riskiness of an investment, which should reassure many advisors and investors who are new to impact investing.

#ImpactInvesting is trending

Impact, SRI and ESG investing may be somewhat new concepts, but thanks to millennial investors, they’re trending.

Compared to their older peers, socially conscious young investors are more interested in aligning their money with their ideals, and an influx of millennial investors are channeling their money into investments, projects, and community initiatives aimed at both doing good and bringing in strong financial returns.

That demand is driving fund managers to consider SRI and ESG when making investment decisions. For example, according to Morningstar, the number of ETFs and mutual funds invested in a socially responsible way doubled between 2012 and 2017.

Here are some more numbers to consider:

• U.S. Trust found that over 75% of high net-worth young investors have reviewed their assets for ESG impact.

• Morgan Stanley found that compared to others, millennial investors are twice as likely to invest in companies that incorporate ESG practices.

• Harvard University’s Kennedy School of Government found that SRI accounts for $26 trillion, which is more than a quarter of all assets under professional management globally.

• That ratio mirrors what the U.S. SIF Foundation found in its bi-annual trends report in 2018. Per the report, total U.S.-domiciled assets under management (AUM) using SRI strategies grew from $8.7 trillion at the start of 2016 to $12 trillion at the start of 2018. That represents 26% of the total U.S. assets under professional management.

• According to GIIN’s Annual Impact Investor Survey of 225 companies in 2017, the total amount invested in impact funds was at least $114 billion. That was up from $7.1 billion and $15.2 billion in 2015 and 2016, respectively.

In the world of SRI and ESG investing, a lot of attention is directed at young investors and millennials, and rightfully so: Plenty of surveys and reports show that millennials are more likely than non-millennials to invest with social and environmental outcomes in mind. Therefore, as an advisor, developing the requisite skill set that will allow you to talk about SRI and ESG investing with younger investors will give you an opportunity to tap into a growing customer base.

However, a quick caveat: Don’t limit yourself to millennial investors.

Consider that overall, 73% of Americans consider social issues when making a decision on whether or not to invest in a company. Socially minded investors who want their money to match their values don’t necessarily fit a particular age demographic, and there’s value in speaking with all of your clients, young and old, about the financial and altruistic benefits of SRI and ESG investing.

Educate yourself, speak up, and deepen client relationships

With growing interest in SRI and ESG investing, many financial advisors want to talk about impact investing, but they either don’t know how to, or they don’t know where to start. Or both.

According to Jim Frazin, CFP and principal at Communitas Financial Planning, that’s normal.

"The two main challenges working in SRI are one, helping people understand about returns and the dual due-diligence requirements and the cost of that, and two, the fact that SRI is still pretty nebulous,” he said. “The issues become one of explaining that SRI is not binary, that it's not just, ‘X company is good and Y is bad, period.’ There are a lot of companies that fall in the so-called gray areas. They are good in some areas, okay in some areas, and bad in others.”

According to Nuveen’s fourth annual responsible investing survey, 83% of advisors reported feeling comfortable with impact investing, but only a third of them initiated conversations with their clients about impact investing in 2018. Although those percentages are up compared to 2017’s numbers, there’s a clear disconnect: Advisors aren’t talking to their clients about impact investing even though their clients – especially millennial investors – want to hear about it.

That’s likely because advisors tend to not discuss investment solutions they don’t know how to explain, and considering Frazin’s point about the nebulous nature of SRI, it can be challenging for advisors to achieve a level of confidence that allows them to initiate client conversations about impact investing.

To help, the Money Management Institute (MMI) and The Investment Integration Project (TIIP) introduced a guide targeted at financial advisors who want to integrate SRI and ESG investing into their practices. The guide addresses industry myths about sustainable investing, disentangles and defines complicated jargon, and offers recommendations on how to help clients reach their investing goals though impact investing.

The guide is a useful tool for advisors preparing for when, not if, clients bring up impact investing.

"Given the rapid rise in ESG investing … it's virtually guaranteed that an advisor is going to get the call or in-person question from an existing or prospective client along the lines of, ‘I want to speed up the transition to a more sustainable economy, and I also benefit from that transition. What great investment vehicles do you recommend?’” said Betsy M. Moszeter, chief operating officer at Green Alpha Advisors.

According to Moszeter, advisors need to keep their industry knowledge up to date and have answers pertaining to impact investing ready for clients, or they’ll risk losing the opportunity to serve those clients. “I can't tell you how often an advisor calls me in a panic: ‘Help! A client is asking for ESG investing options, and I need your help getting up to speed to answer them so that I don't lose the relationship,’” she said. Additionally, frameworks like the United Nations Sustainable Development Goals (SDGs) provide a straightforward way to talk about impact investment objectives with clients.

Given that more and more investors want to make a difference with their dollars, well-informed advisors who are both knowledgeable about SRI and ESG investing and willing to have a conversation about it are putting themselves in a strategic position to solidify relationships with clients and grow their customer base.

Therefore, when it comes to SRI and ESG investing, advisors should consider doing the following to stay on top of industry trends and best practices:

1. Educate yourself: Take the US SIF Foundation course, “Fundamentals of Sustainable and Impact Investment.” Completion of the course results in a certificate, a better understanding of the growing impact investing industry, and it qualifies for three hours of continuing education credits. Also, research SRI Investment and ESG Research providers.
2. Engage peers: Attend industry events, like The SRI Conference, which will take place in Colorado Springs, CO November 13-15, 2019. Meeting other advisors and industry leaders will make you feel more comfortable about discussing SRI and ESG investing with your clients.
3. Excite clients: Host client events to stoke interest in SRI and ESG investing. Use events as an opportunity to demonstrate your knowledge and to reinforce how clients can concurrently address social factors, boost their portfolios, and meet financial performance goals. One idea is to share others’ impact stories as a way to make SRI and ESG investing more relatable to clients.

The list of reasons why clients will be interested in SRI and ESG investing is long, but there’s really only one reason why advisors should emphasize impact investing with clients: Clients want to talk about it.

Do the requisite heavy lifting to make sure you’re prepared to speak with your clients about how they can align their values with their dollars, all the while enjoying better risk management and performance.

The future of impact investing

Compared to many advisors, Renee Morgan, the impact director at The Impact Investors, has taken impact investing to a whole new level. She exclusively does ESG investing.

Morgan was trained at a traditional financial firm, and she says that like many advisors, her values were often in conflict with some of those firm’s investments and partnerships. After three years, she decided that she’d had enough. She drew a line in the sand and switched to a solely ESG investing model.

Today, Morgan only works with clients that care about values as well as returns. “It was scary,” she said of the transition. “I feared I would lose business. Instead, it has increased the quality of my business beyond my wildest dreams, and it was the best decision I have ever made. My clients and I have a connection that exceeds that of a financial planner and client: we share values. It makes work a million times more rewarding.”

In addition to finding her work more rewarding, Morgan says that switching to exclusive ESG investing has changed how she views her place in the world around her. “Within ESG, there is a way to accentuate and focus on what is most important to you as a person,” she said. “It is one of the biggest benefits of the field – you can spend a lot of time doing things you feel are important.”

For Morgan, that’s racial justice and gender equity. Being able to incorporate the primary focus of her personal life into her professional life “means everything” to her.

“I have impact within the ESG industry as well as within the work I do as a volunteer,” Morgan said. “I’m vocal in the community, and clients see me at events or in the newspaper, and they appreciate that I am active in that way. It reinforces their commitment to ESG and my commitment to them and deeper impact.”

Although not every advisor can be like Morgan and switch over to an exclusive SRI or ESG investing model, to serve clients of all income levels most effectively, advisors must think strategically about how to produce and deliver outcome-oriented wealth management solutions empowered by technology, rooted in societal benefit, and customized for individuals and institutions based on their risk, return, and impact objectives.

Impact investing isn’t going anywhere. SRI and ESG investing aren’t just trends that will quietly fizzle out and be replaced by something else. Rather, they’re changing the status quo of capital allocation, and they’re redefining how we think about investing.

By shifting the focus beyond financials to a place where social returns and fiscal yields are weighted equally, impact investing will ultimately chisel away at the perceived divide between capitalism and social and environmental good.

Based on the data, the trends, and the demand, if you’re an advisor with one eye on today and the other one on tomorrow, it’s time to grab a fork and give impact investing a taste for yourself.

Danielle M. Burns, MBA, AIF® is vice president and head of business development for CNote. Prior to CNote, Danielle was vice president of sales and marketing for First Affirmative Financial Network, LLC. Her background emphasizes technology training and practice management development for financial advisors. Danielle began her financial services career in 1994 at the Wachovia Corporation where she worked for both Wachovia Bank and Wachovia Securities performing a variety of management duties over her nine-year tenure. Danielle serves on the board of Green America, a not-for-profit membership organization founded in 1982, whose mission is to harness economic power to create a socially just and environmentally sustainable society. Danielle is a certified trainer for Walking On the Glass Floor which promotes diversity and inclusion for women in leadership. Danielle holds an MBA with an emphasis in marketing as well as the AIF designation. Danielle is a thought leader and industry connector who focuses on building and creating dynamic advisor relationships with vendors and other business partners. Danielle can be reached at [email protected]

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